Employee Shareholder Scheme – An update

Friday 13 September 2013

This summer, the House of Lords accepted the proposal of introducing the employee-shareholder contract, after the Government agreed to make the necessary concessions to the Growth and Infrastructure Bill (http://services.parliament.uk/bills/2012-13/growthandinfrastructure.html).

As my colleague Paul Kelly explained on 10 March 2013, under employee-shareholder contracts, the individual employee shareholder will now be given shares in the employer company in exchange for waiving certain employment rights.

The Scheme has been controversial since its inception, causing murmurings of discontent from a number of directions. I refer to my blog on 10 October 2012 in this regard.

• Benefits such as jobseeker’s allowance will not be affected if an individual does not wish to accept an employee-shareholder position;
• There will be a requirement for employers to provide a written statement of the particulars of the employee-shareholder arrangement  and the subsequent rights attached;
• There will be a period of seven days, during which an employee’s acceptance of this offer will have no legal effect.

During this period of seven days, the scheme requires the individual to receive independent advice considering the terms and effects of the scheme, presumably in the same way that an employee must receive independent legal advice before entering into a settlement agreement.

Under the Bill, the Government agreed that the employer should pay ‘any reasonable costs’ whether the employee takes the offer or not, and as we know, the term ‘reasonable’ will have a variety of interpretation from both sides.

First signs of enthusiasm……really?

Recent headlines have suggested that the scheme is being met with “great enthusiasm”, quoting Martin Benson of accountancy firm Baker Tilly, “Of course there will be some employees reluctant to trade employment rights for shares with tax breaks but once the employees in fast growing companies understand the limited nature of the rights they are giving up, then experience has shown that they become very keen to take part.”

It is worth a reminder that the scheme allows companies to offer shares to their employees, worth between £2,000 and £50,000 and those shares can later be sold free of tax and national insurance. There is no maximum amount, however shares transferred are only free of capital gains tax up to £50,000.

Clearly, if a company is successful, an employee shareholder may sell on his or her shares, receiving a completely tax free gain. The risk remains however, that if the employee is selected for redundancy after no business success, or even a degree of decline, they will have given up their rights on redundancy for nothing. The initial transfer of the shares is not tax free either, as it is subject to income tax and so if the worst were to happen employees may even lose out with this scheme.

In the current economic climate it is easy to associate with initial reservations over this scheme. There are also clear issues regarding the practicalities of such shareholdings, in terms of the contents of necessary written agreements between the parties, valuation and provisions for good and bad leaver employee shareholders. Whilst the scheme may look promising from the outset, digging a little deeper whilst obtaining the necessary legal advice, may put employees off.

If you require advice in respect of employee shareholder schemes then please do not hesitate to contact our Employment team.